Cash transfer is no magic wand

Jyothi works as a labourer in Kotkasim (Alwar) where a pilot project was carried out to test the effectiveness of cash subsidy transfer in the case of kerosene distribution.

Unlike many others she has a bank account and waited eagerly to see her account credited with the differential amount (Market price minus the subsidised price). But to her dismay, there were delays and she found it hard to sustain.

She ended up not buying kerosene. Failure of the pilot project is taken as an indicator by many that the proposed reform must be scrapped and is bound to fail. Opponents to the suggested reform have gone to great lengths to criticise the proposed reform and stall the process.

It appears that a lot of energy has been wasted in the process, which could have been used alternatively for more meaningful pursuits such as measures to plug the loopholes in the currently proposed reform or even better suggest better alternative measures that would not have the loopholes that the proposed system exhibits.

The reasons for cash transfer subsidy reform are well known. The purpose is to ensure that leakages in the system are plugged and the impact arising from leakages on the fiscal deficit is reduced.

It has been estimated that switching over to the cash subsidy transfer scheme would save the government exchequer a whopping Rs 20,000 crore in 2013-14. Given that is a sizeable amount, it might just be worth the try.

After all, any measure to reduce fiscal deficit translates into lesser tax burden for many as ultimately the deficit would be funded by taxpayers at some point of time. The government has rightly decided to implement the reform in stages beginning with only kerosene and LPG. 

Given the population of the country and the percentage living below the poverty line, any reform to ensure inclusive growth and alleviation of poverty is a mammoth task and cannot be free of loopholes and impediments at every stage.

 The pilot project for kerosene in Kotkasim brings to light important impediments in the introduction of the scheme. The pilot project would go a long way in giving policymakers a solid ground to begin with and design appropriate measures to enhance effectiveness of the program.

After a year since the pilot project was implemented, studies indicate that the sale of kerosene actually declined as demand had declined. Several did not benefit from cash transfer as either they did not have bank accounts or there were delays in cash transfer. The immediate takeaways from the project would be to ensure that every household has an individual with a bank account and appropriate mechanisms to ensure regular credits across bank accounts. Villages may not have sophisticated banks or ATMs in many corners as we have in cities, but they do have something called as Self Help Groups (SHGs) which are financial intermediaries owned by the poor and assisted by banks under the NABARD scheme.

So far these intermediaries have been serving as a safe place for parking one’s savings, a source of loan for emergency and enterprise needs at reasonable rates of interest. SHGs have come a long way in improving lives of several poor people. The example of “Velagu” program carried out in Andhra Pradesh illustrates how successful the SHG initiative can be in improving the lives of the poor.

The program supports community investments as well as community insurance. Members of the groups have been trained in financial management and accounting, which has enabled the groups to have tie ups with banks and other financial institutions.

Efforts have also been taken to spread awareness about the importance of education and healthcare. The World Bank, in fact, recommended that the rest of the states in the country must follow the example set by Andhra Pradesh in uplifting the poor.

Across the country several villages have SHGs. They could be roped in to assist in ensuring that every household has a member with a bank account. As a matter of fact the account held by the members of the SHGs, can be used for cash transfer. The SHG can help in monitoring and dispersing cash subsidy to the beneficiary. If this possibility is examined, the issue of not having access to banking facilities in the vicinity would be taken care of.

Further, the cash subsidy amount can be transferred in the same manner in which funds from external banks are transferred to the SHGs, thus eliminating the role of business correspondents and the possibility of leakage thereof.

 Some critics argue that these SHGs might actually turn out to be middlemen going forward and might open up new venues for leakages. It is a possibility no doubt, but if that was true, funds transferred from external banks ideally would not have reached the poor and success stories such as “Velagu” would not have been heard of.

Since the SHGs are formed and managed by the rural people themselves without much external intervention, it might be a good idea to trust them with yet another responsibility which would go a long way in benefitting them and also saving the tax burden on our pockets.

Timely credit

The pilot project in Kotkasim brings to light another problem. The delay in transfer of cash. This problem definitely needs to be investigated and does raise questions about the effectiveness of the cash transfer reform. But it is a question of finding out reasons for the delay and fixing the loopholes, rather than support scrapping of the reform without providing a suitable alternative. Lessons may be derived from the pension schemes available in the country.

 Gone are the days when the elderly had to travel long distances and wait long hours to receive pensions. Pensions, these days, are credited to bank accounts generally without a glitch. The system has evolved and loopholes have been closed. 

Adjusting for inflation

It ultimately would be the responsibility of the government to anticipate inflationary pressures and adjust the cash subsidy amount. This is not a new responsibility as even in the case of subsidised prices, the government has to work out the amount of subsidy it is willing to offer to make the prices of essential commodities more affordable to the masses. In the case of cash transfer, the situation is no different. It just needs to devise a system to modify on time the quantity of funds released for the purpose of cash transfer.

The difference in the system would be only who the recipient is. Under the new system, the recipient of the subsidy is not the oil company or the middleman but the final customer.

It is a matter of time before the reform can take off and benefit millions across the country. It is no magic wand. The reform would have hiccoughs in implementation like any other reform. What is important, is to understand the necessity for reform, identify policy measures trying to make it flawless. The purpose of pilot projects is just that and not necessarily to scrap reforms in haste.

(The author is a freelance writer)